The disclosed method concerns the prediction of the short term movements in the stock price of publicly traded corporations in periods of sudden and material change, with a particular focus on corporate crisis scenarios. Crisis-type stock price dynamics have been the subject of detailed analysis and modeling in the past, both academic and commercial. This is hardly surprising; billions of dollars are lost or, in some cases, earned, in the highly volatile dynamics which follow the news of such sudden events. The input parameters of existing predictive impact models are typically the financial attributes of the event itself and the companies involved. The disclosed method augments this approach with a new and fundamentally different class of attributes; communication parameters which can be used to predict the media impact of different types of events. The number of potential or actual stock owners who learn of a crisis, almost simultaneously and usually within the first 24-hour period following the crisis breaking, has a major impact on the demand/supply balance for the stock and therefore on the price. A prediction of a change in a stock price is a prediction of a shift in demand/supply, which in turn relies implicitly on assumption about the timing, tonality, quantity, prominence and audience reach of news coverage.
The disclosed method proceeds from the recognition that the business attributes of the event itself, and of the subject company, are often poor predictors for the volume and tonality of the media coverage, through which medium the markets will be informed and kept up-to date of the event/crisis. It is not that these parameters are invalid, but they are insufficient. As the disclosure will demonstrate, a sudden event or crisis and the corporation impacted by it, are associated with communication parameters as well as the business parameters already used by existing prediction models. These communication parameters include factors such as the quality of photographs, the level of convergence with current public concerns or fashions and the level of positive or negative endorsement by key influencers. The disclosed method permits the identification of such communication parameters for different types of events and it provides quantification of both the influence on the news coverage and on the resultant stock price movements.
The central principle of the methodology is that the communication factor can be derived by a three-step process: a) identify all the parameters with high correlations against stock price movements b) identify all the parameters which have a high correlation against the media impact c) all the parameters which have a high correlation against both the media and stock price are the ones with the highest predictive potential. It may be counter-intuitive that a parameter such as the quality of the photographic material is treated as the dual business/communication parameter rather than purely a communication parameter. However, parameters which impact on the reportage of an event will also influence the level of confidence in a stock and therefore the price.
A related application (U.S. Provisional Patent Application No. 60/595,175 filed on Jun. 13, 2005) has been filed for examining the non-sudden but more sustained spread between analyst targets and stock prices by analyzing how investor confidence is influenced continuously by media coverage.